What It Is:
How It Works/Example:
A fund manager implements the chosen investment strategy by selecting when to buy or sell the assets held in a portfolio.
Usually a fund manager will supervise a team of analysts who perform research on the investments and then make buy/sell recommendations. When you invest in a fund, part of the fees you pay go toward the salaries and bonuses for the fund manager and his or her team of analysts. These fees must be disclosed in the fund's prospectus.
Why It Matters:
Some studies suggest the performance of a fund in the long run is not contingent upon the skill of the manager, but rather is subject to uncontrollable market forces. Other studies contend that the fund manager's skill can indeed help a fund outperform its passively managed competitors. The outperformance that can be attributed to an active fund manager is known as "alpha." High alpha is extremely difficult to achieve over long time periods.
Regardless of whether a skilled fund manager can significantly bolster returns, many investors prefer to leave their money in the hands of an expert, and therefore fund managers play an important role in the investing world.